A Fifth Of Spain's GDP Just Voted To Secede - What Now?

Everywhere you look there are signs that Europe is coming apart at the seams. Just a month after the crisis in Greece abated, the influx of refugees fleeing the war-torn Mid-East finally overwhelmed the Balkans leading directly to border closures and precipitating a spat in Brussels regarding how best to handle the people flows.

In short, not everyone agrees with Angela Merkel’s open door policy and indeed, Hungary’s Viktor Orban has led the push for the preservation of what he calls Europe’s “Christian heritage” by keeping asylum seekers out. Now, there’s a serious rift developing and further efforts to force recalcitrant countries to accept migrants they don’t want could well spell the end of the Schengen project.

Meanwhile, Portugal is on the brink of a political crisis as Costa’s Socialists move to align with the Communists and the Left Bloc in an effort to overthrow the government and roll back austerity, presaging a debt showdown with Brussels and Berlin.

As if all of this weren’t enough - and we didn’t even mention the potential for “Brexit” - the Catalan black swan is back on the heels of what amounted to an independence referendum in September (see here).

On Monday, Catalonia’s parliament approved a “democratic disconnection” resolution which will see the region push to separate from Spain and establish an independent republic. Here’s WSJ with some color:

Catalonia’s parliament approved a resolution Monday to take steps to establish an independent republic, vowing it would begin ignoring Spanish institutions and setting up a potential standoff with the government in Madrid.

The proposal to commence a “democratic disconnection” passed by a vote of 72 to 63, after a two-hour debate. Prime Minister Mariano Rajoy, who has said the separatist push represents Spain’s major challenge ahead of Dec. 20 national elections, pledged Monday to use all of the authority of his office to halt the secession bid.

Mr. Rajoy said his government would petition the Constitutional Court this week to have the resolution declared void.

Legal experts say the court will almost certainly bar Catalonia from taking any steps to put the resolution into effect, paving the way for a test of wills. The resolution singles out the Constitutional Court as being “delegitimized and without authority.”

The nine-point resolution calls on Catalonia’s parliament to start within 30 days to prepare laws to create independent social security and tax authorities. Pro-independence parties have said they hope to complete the separation process within 18 months.

In September Rajoy’s government boosted the powers of the constitutional court to allow it to quickly suspend leaders who disobey its orders, in a move aimed directly at Catalonia.

The government has also raised the possibility of invoking article 155 of the Spanish constitution, which allows Madrid to supersede the authority of a regional government that is acting outside the law or to cut off its funding.

So yes, Catalonia is looking to officially secede from Spain in just a year and six months and the push comes less than two months ahead of national elections which very well could end up creating precisely the same type of political dynamic as that which is currently unfolding in Portugal. Back to WSJ:

For Mr. Rajoy, his response to the Catalan gambit could play a key role in determining whether he is able to stave off challenges from the rival Socialist Party, as well as two upstart parties, and win re-election.

“It’s a very delicate situation that requires a deft balance,” said Carlos Flores Juberías, a constitutional law professor and political analyst at the University of Valencia “He has to show firmness, but any action he takes must be surgically targeted” to avoid more people rallying around the separatist camp.

Worse still, if Catalonia were indeed to break away, it could very well end up costing Spain in the debt-to-GDP department. As DB noted before September's parliamentary elections, "the impact would be significant on the Spanish economy, [as] without an agreement to share the stock of debt with Catalonia, Spain’s’ projected public debt for 2015 would move from just above 100% of GDP to about 125% of GDP. And this accounts only for the mechanical impact. On 21 September Mas stated that if the central government refuses to negotiate, Catatonia might not pay back its liabilities to the central government."

In other words, it's possible that we could end up with a situation wherein the left gains more influence politically just as Catalan independence meaningfully increases Spain's debt-to-GDP ratio (don't forget, Catalonia accounts for nearly a fifth of Spanish output). Clearly, that's a recipe for a standoff with the troika which means that soon, Brussels could end up facing an austerity revolt not only Portugal, but from Spain as well. Underscoring the above is the fact that Podemos supports a referendum on Catalan independence. Here's The Guardian again:

Spain’s prime minister, Mariano Rajoy, who is preparing for a general election on 20 December, has the backing of the main opposition Socialists and the new centre-right party Ciudadanos.

Of Spain’s main parties at the national level, only the far-left Podemos has resisted Rajoy’s effort to forge a united front on the issue. While Podemos wants Catalonia to stay within Spain, it has also said it would support a referendum on the matter.

Here's Open Europe with three key question to consider as we enter "uncharted territory":

First, the pro-independence front in the Catalan parliament is a very diverse one. Incumbent Catalan President Artur Mas and his moderate nationalist CDC party want Catalonia to become “a new nation in Europe”. That means leaving Spain, while remaining a member of the Eurozone and the EU. The radical left-wing CUP party – whose backing is key for the secessionist camp to hold an absolute majority in the regional parliament – wants Catalonia to leave Spain, the euro and the EU. Incidentally, the CUP is also opposed to Mas staying on as Catalan President. Doubts over the longevity of such an alliance are legitimate, and could become crystallised as the parties discuss issues such as the currency and institutions of a new Catalan state.

Second, assuming that Catalonia unilaterally declares its independence (still a very big ‘if’ at this stage), other EU countries would be unlikely to recognise it as a state. The European Commission would likely also voice objections to Catalonia remaining in the euro and the EU, similar to its intervention in the Scottish referendum campaign. That would be the final nail in the coffin of the “new nation in Europe” project. Is Artur Mas really prepared for such a scenario? I doubt it – hence why I believe he still sees this ‘roadmap’ as a way to put pressure on the Spanish government to negotiate. Indeed, he needs to be careful heading down this path – as the situation could well spiral beyond his control (some might say it already has).

Third, in the 27 September Catalan elections the pro-independence parties secured an absolute majority of seats in the regional parliament – but not an absolute majority of votes. This raises questions over the democratic legitimacy of this independence process. The reality is Artur Mas and his allies were looking for a ‘plebiscite’ in favour of secession – but this failed to materialise. Together, the three pro-independence parties won less than 48% of the vote. Is this enough to embark on a path to a unilateral independence declaration? Most certainly not. One has to wonder whether there will be a response from the 52% of the electorate who did not back such an approach.

In short, this is a big deal. You're talking about a scenario that would ultimately involve booting part of Spain from the common currency in the event of secession, leading to who only knows what kind of headaches for Catalans, but perhaps more importantly, there's the very real potential for social unrest here depending on how Rajoy handles the Catalonia "problem," and on that note, we'll close with a quote from Rajoy himself: